2011 U.S. Debt Forecast: Five Simple Ways to End America's Spiraling National Debt

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By 2020, U.S. debt could reach 90% of the United States' annual economic output.

That's more than $20 trillion in national debt, which would mean Americans are on the hook for more than $65,000 per person.

Just by paying the interest on that much debt, the United States could become incapable of repairing its own roads or educating its children.
The U.S. is already receiving warnings from Moody's and Standards & Poor's that its credit rating is being threatened by its debts.

And moving into a lower credit rating bracket would give America such companions as Bangladesh, Serbia and Mozambique. I'm sure all of those are great places to take an "extreme" adventure vacation. But do you really want to live there?

The U.S. government is still insisting it can fix its debt problem with short-term patches and absurd "spending freezes". These are like using a Band-Aid to fix a broken leg – or to be more accurate, a cracked skull.

And since Congress is too busy squabbling to come up with these ideas themselves, I'm willing to give them a short, five-step list that will correct the country's debt problem with as little pain as possible for the American people.

Read on to learn the five steps that could eliminate America's bad debt.

Dear Mr. President and members of Congress:

With your policymaking actions of November and December, you have given the U.S. economy a short-term boost of adrenaline.

But these short-term gains carry a long-term cost. In the wake of the biggest financial crisis since the Great Depression, the U.S. federal government is looking at running $8 trillion in deficits over the next 10 years. If that forecast becomes a reality, the already-onerous national debt would soar to more than $20 trillion.

Given that outlook, without additional action on your part, the U.S. economy faces a precarious future and won't return to full health.

But there are five clear steps you can take that would revitalize the U.S. economy. These moves will help reduce unemployment and will keep inflation at bay.
And most importantly, by effectively slashing the federal budget deficit as well as the national debt, this plan will ultimately enable the U.S. economy to regain its former competitiveness.

Success, of course, is in the details.

Short-Term Gains Will Lead to Long-Term Pain

There's little doubt that policymaking moves of late 2010 will lead to near-term gains in 2011.

For instance, your so-called "QE2" bond-purchase plan reduces the strain of financing the U.S. federal deficit, which will free up funds for private businesses to expand. Your tax-stimulus plan eliminates a January tax increase and provides further purchasing power to the American people, boosting consumer demand and economic output.

But these short-term gains carry a long-term cost. And without additional action on your part, the U.S. economy will never return to full strength.

In fact, after a few months of stimulated activity, inflation will return, bond yields will soar to uncomfortably high levels, and the U.S. recovery will be choked off – which will prolong the misery of high unemployment.

To make sure the recovery continues beyond the middle of the New Year, you need to take action in five specific areas. And you need to do so in the next few months.

Let's take a look at the areas that need attention, one at a time.

Step One: Spending Cuts a Must

First and foremost, you must cut discretionary public spending by at least $150 billion per annum (the approximate equivalent of about 1% of current gross domestic product, or GDP).

Granted, it will take more than that to restore the federal budget to balance. But – as you are well aware – a larger spending cut would be deflationary in the short term.

Also note, that $150 billion figure is a gimmick-free number. So if you engage in any of the usual "funny" accounting – shoving programs into previous fiscal years or passing liabilities onto the states – those aggregate dollar figures would have to be added to the $150 billion.

And that's not all. Any additional spending – such as the implementation costs of "Obamacare," extensions of unemployment benefits, or payouts to 9/11 first responders – has to be fully offset with additional cuts.

Step Two: Revenue Must Increase

However, there are a number of possible tax increases that, far from having a negative effect on the economy, would end subsidies for activities of little economic value.

Ending the tax-deductibility of corporate debt is a big one – it only encourages damaging leverage. Another tax you could usefully institute is a small "Tobin tax" on Wall Street transactions, which would sharply reduce rent-seeking "fast trading" and derivatives activities.

There are other increases that are worth discussing, too, including the removal of the home-mortgage tax credit and the end of the tax deductibility of charitable contributions. Charitable deductions, for instance, are very inefficient in producing charitable contributions for the genuinely poor, and arguably damage education by forcing it into inefficient "non-profit" status.

Eliminate these "tax expenditures" and you can afford to make the Bush tax cuts permanent. And if you have any money left over, you could eliminate the dividend tax and reduce the estate tax to 15% to 20%. You'll be amazed how much better the economy performs with these distortions removed.

Step Three: Heed the "Deficit Commission"

All of you know that the Bowles-Simpson commission's recommendations for making the Social Security entitlement program viable over the long term make sense. So implement them.

The commission did not recommend anything useful for Medicare/Medicaid. But solving that will require you to get the tort lawyers out of medicine and to eliminate the cross-subsidizations in the medical system. But I understand that healthcare is a sensitive subject right now, so maybe leave this one for 2012 or even 2013.

Step Four: Stamp Out Wasteful Subsidies

If you really want to make the economy work better, you could remove the subsidies for agriculture and "green" energy, especially the combined subsidy and tariff for corn-based ethanol. But I understand that may be asking too much!

Step Five: End the Fed Follies

Ben Bernanke, we have not forgotten you. Keep the "quantitative easing" in place for a few months if you must, until Congress finally executes the above steps one through three and actually reduces the U.S. deficit.

But for goodness sake, please stop subsidizing borrowing at the expense of saving.

We know what you refuse to admit, that the "true" rate of inflation in the U.S. economy is now at least 3% – and rising. That means the benchmark Federal Funds rate should be at least 5%, to give savers a reasonable real return on their capital.

Put short-term interest rates at that level, and allow long-term rates to rise to their market level of around 6%, and you've given the U.S. public a proper incentive for saving. At the present time, you and Congress are combining to de-capitalize the U.S. economy, penalizing saving and encouraging huge balance-of-payments deficits. In the long run this will force U.S. wages down to emerging-market levels.

Stop doing this. Now!

The Bottom Line

I realize that I'm making some tough calls here, but none of these recommendations were made lightly.

The reality is that this country – and its economy – has to change course.

To understand the urgency – and the stakes – think of it this way: If we continue along this path and achieve the currently projected debt level of $20 trillion, every American's share of the national debt would exceed $65,000.

And that's not the half of it. According to the U.S. Congressional Budget Office (CBO) U.S. federal debt ballooned from 40% of gross domestic product (GDP) at the end of 2008 to more than 50% last year. And in a report issued last spring, the CBO warned that unless we change course, the U.S. public debt could reach 90% of the nation's economic output by 2020.

America's debt-to-GDP ratio hasn't been near the 100% level since the end of World War II, when it peaked at 109%. When Greece touched off the worldwide sovereign-debt panic last year, its debt-to-GDP ratio was right around 120%.

Even without such default fears, high debt loads stifle economic growth. In fact, one recent research study – conducted by economists Kenneth S. Rogoff of Harvard and Carmen M. Reinhart of the University of Maryland – concluded that when debt-to-GDP ratios exceed 90%, median growth rates fall by 1%, and average growth falls considerably more.

As Isabel Sawhill of the Brookings Institution noted: "The interest can get so burdensome that the country can't afford to repair its highways or educate its children or provide other essential services. You become a much weaker nation."

We can't let that happen.

If you, the President and Members of Congress, take the steps that I've outlined above, you will all deserve to be re-elected and U.S. Federal Reserve Chairman Ben Bernanke will deserve another term of office in 2014.

If you don't take these steps, and the U.S. economy fails to recover, the American people will rightly react harshly in 2012.

And none of you will like the result, which will make the Tea Party seem like – well, a tea party.

Sincerely,

Martin HutchinsonContributing EditorMoney Morning

P.S. Thanks to Bernanke's latest round of "Quantitative Easing," gold is set for yet another 12-month climb. And once you get your free copy of the 2011 Investor's Forecast, you'll be in position to beat everybody else's gains by 3-to-1. But gold's the low-hanging "commodities" fruit – easy money you can take advantage of right away if you know how to play it. Indeed, the "big bang" in commodities this year will surprise most investors… Full Story.

Please explain what a "Tobin Tax" is. Please don't take the position that deravitives are a villain, malicious and have the ability to control markets. That's a zero sum game to be played by speculators who know the score. Don't look at them as cash cows either. A lot of the strategies they employ involve holding many, many positions and waiting for a movement of as little as one cent!

u people dont get it obama is only concerned about reelection he ha snecome 1 of them bought and paid 4 change will come and it will make egypt and libya look like girl scouts on a sunday outing?????with the economy where bush cheney put it its comparable 2 the band playing on the titanic y cant u people see this all obama did was take the wheel of a ship that was already stern up and him dumb ass harry and allthe politicans were only concerned about relection if they werent then jobs and the economy would have been the most urgent agenda nstead garnering donations from fraud street and banksters was and is all there concerend about???? the banks knowingly committed criminal fraud and every att gen n every state knows that but there all on the take 2????so politics as usual but when the people get pushed down enough those on wall street,lobyist,bankers and politicans r n 4 rude bullet riddled awakening???? the boston tea party was about the well 2 do and the rich haveing 2 pay tax 2 king not the working people they didnt drink tea but theyer having 2 eat shit and when they get enough aqnd it aint far off the mitch mcconols harry rieds anit going 2 have nowhere 2 hide n yhis country and there own neighnors will hunt them down,im affraid just like the titanic its 2 late 2 right the ship if the tanic had hit the berg head on they would have been much better off were n the same boat and all the vested interest will suffer the same fate as the king and queen of france…let u eat cake well when theres no cake games up???????????????????????motorhome

if we bring back the draft, everyone would be equal and save $$$$$ for DOD and stop wasteful spending, ie. gave other countries lots of $$! third, use ocean energy, i guarantee would work, thus oil wouldn't be an issue for increase debts!

I agree with raising the short term interest rate . Also I think we should pull out iof Iraq and afganitan and stay completly out of Lybia…. We should tend to our own garden,and do more like China and Russia NOTHING/// tHEY ARE SITTING BACK AND WAITING FOR AMERICA TO DIG ITSELF DEEPER IN THE HOLE bs3607

Interesting that some still believe that government spending cuts are deflationary.

-Capital left in the open market rather than confiscated by the federal government will go to the free market. This is not deflationary.

-Since federal employees cost at least twice as much as private, the same money will create two private jobs. This merely spreads the money around, again not deflationary.

-Since the free market allocates capital more efficiently, more is left for R & D, etc. Also not deflationary, only deflationary in the sense that goods and services are produced more cheaply, electronics being a perfect example.

Yesterday, All our troubles seemed so far away…Clinton left the nation's financial condition quite satisfactory. Even young, attractive and amusing female staffers found him "accomodating" and certainly appreciative of women's "role" in governance. Truly a bit too "liberal" in some respects!

Along came Bush #43 who "conservatively" ordained that taxes were unnecessary, especially for those God blesssed "American/elite People". Confident that the remorseful Iraqi "people were liberated and properly reeducated by his dad's military prowess in the mother of all wars (with the possible exception of a few, unfortunately massacred Kurds). Convinced that Muslims were obviously inferior and incapable of disposing of their defanged, despotic leaders. All the world, still addicted to the everlasting riches of oil. We collectively ignored their stobborn brand of radically religious right, until about 30 or so, obviously crazed " would-be Terrorists" hijacked a few commercial jets and calmly re-directed their flight plans.
Suddenly the Band played "The World turned upside down" , only this time from NEW York-towne. At this instant What the world deserved from our Intelligentsia was a well reasoned "Declaration of INTER-Dependence". Instead, the bully pulpit of W.W. (WRONG_WAY) Bush et al brilliantly declared WW3 on the American economy… for years to come. SURPRISE?? !

We are irresponsibly late in writing an international Declaration of InTERdependence…recognizing that we are defacto citizens of the World. Visualise a huge I/O Socio-Economic Model with each vertical-horizontal intersection deriving a correlation coefficient. Not static but ever changing as it's "Environmental" components dictate. We accumulate prodigious tons of "data" (throughout the entire Universe) these days so we ought to be capable, with determined mutual cooperation, to develop increasingly sophisticated algorithims. Murphy's Laws, black swans, Unintended con-
sequences, etc. will alter "reality" as they always do. Homo sapiens must continually ADAPT in order to survive, much less make progress. Accurate definition of our language terms is pre-req!

Math people, math…..I personally ran the numbers and if Congress were to cut all discretionary spending to zero, the annual deficit would still be about $400 billion. If the Republicans would just step up and say let's get out these wars we started, the Democrats would surely agree. But, egos and quitters and pride are a witches brew for failure. So I continue to head history's lessons and make preparations. Mandarin is a great language to learn at 50!!

China is buying gold and other assets with US$ because they know the $ is tanking globally. So does Japan and they may want its loans to the US paid off at a higher rate to rebuild their country.

When the dollars value drops to $.70, inflation rises to 6% from its current 3% level and commodity prices continue to rise and the Fed continues to print money, you'll need a wheel barrow instead of a wallet to carry your money in. Your nest egg, if you have one will be worth half as much after taxes and fees.

I think the riots in the Middle East are more about food, opportunity and education rather than the democratic way of life. If they want to get international help (arms, medical supplies, training) they must use the word 'democracy', and they will.

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